ANZ Group CEO Mike Smith says NZ margin growth nearing end; World making 'painful adjustments necessary to deal with massive debt burden'

By Gareth Vaughan

Margins at ANZ New Zealand continued their upwards trajectory in the December quarter but are unlikely to rise further because of stiff competition among the banks for deposits, ANZ Banking Group CEO Mike Smith says.

Smith, speaking on a conference call with analysts' after the ANZ Group issued its first quarter trading update, said margins at ANZ NZ, which includes the ANZ and National banks, UDC Finance and OnePath, were still "continuing to increase a little bit."

"(But) we do expect that to flatten off because the amount of competition for deposits is increasing and therefore it is unlikely that we’ll see any further increases there," said Smith.

In the year to September 30, 2011, ANZ NZ's net interest margins rose 11 basis points to 2.38% and 5 basis points in the second half-year from first-half to 2.40%. The rise came as ANZ NZ delivered record annual net profit after tax of NZ$1.085 billion. That was a year-on-year rise of NZ$218 million, or 25%. The ANZ NZ result was part of a record annual ANZ Group profit as Australia's big four banks made combined record annual profit of A$25 billion.

The ANZ Group's December quarter cash profit of A$1.48 billion, announced on Friday, was also a record.

NZ lending down, deposits up

Smith noted the New Zealand economy was subdued but said the direction ANZ had set for its business here had seen it "continue the positive momentum" of 2011.

"Lending volumes fell slightly (0.7% in NZ dollar terms) well we put in a good performance on the liabilities side with deposits up 2.4%," said Smith. "Credit quality has continued to improve as has the business margin."

The strategy to simplify the New Zealand business, and to continue to reduce its cost base, was making good progress. This includes the move to shift ANZ and National bank staff onto one IT platform with the move coming eight years after ANZ bought the National Bank from Britain's Lloyds TSB. Good progress had also been made with testing and integration, Smith added, with the work expected to be completed later this calendar year.

"Completion of the programme is expected in incur around A$90 million in IT and related costs," Smith said. The 2011 annual result included costs related to the IT project of NZ$111 million. A year ago the bank said the combined cost of switching to one IT platform and restructuring group management, including laying off 45 staff and establishing a regional reporting structure, would cost NZ$220 million.

IT move running late as ANZ strives to be regarded as NZ's best bank

ANZ  is effectively shutting down the ANZ IT platform and adopting the National Bank’s Systematics core banking system in a move that was supposed to be completed by late 2011. An ANZ NZ spokesman said the move to a single IT system is aimed at simplifying the business, and providing better service and products for customers, with "the ultimate goal of being regarded as New Zealand’s best bank."

"We are now in the thick of the test phase and as we move forward in 2012 our strong focus continues to be on testing and rehearsing for conversion to ensure that we get this right," the spokesman said.

He said progress so far on the move to a single core banking system included;

We have reduced complexity for ANZ and National Bank customers by simplifying our product suite, including successfully decommissioning around 80 products.

We have migrated over 380,000 customers to the simplified suite of products, which are now more relevant to customer needs and more competitive.

Completed staff training on systems and processes to ensure National Bank and ANZ staff are fully up to speed and can continue to seamlessly support customers.

More than 100 functional releases have been carried out, adding value and increased functionality for new products and some existing products, and progressively clearing the way for conversion activity in 2012.

'Massive debt burden'

Meanwhile, Smith had a downbeat prognosis of the global economic situation.

"I believe it’s clear we’re presently in the second and more protracted phase of the global financial crisis. This is really the work out phase where the world makes the painful adjustments that are necessary to deal with what is a massive debt burden," said Smith.

"We’re seeing this in the US where there are positive signs the consumer sector is recovering very slowly from the subprime bubble, and of course the crisis among US banks."

"We’re also seeing it in Europe which is struggling to deal with unsustainable levels of government debt, a weak banking system and the enormous volatility that this is causing, not only for financial markets, but for the social cohesion in countries that have been forced to go through a rebasing of their living standards," he said.

"We’re also seeing it in strong countries like Australia where concern about the economic outlook overseas and the impact of structural change going on in the economy is driving cautious behaviour both from the consumer and from business."

Credit growth would continue to be lower for the foreseeable future, especially in Australia and New Zealand. Based on the Reserve Bank's sector credit data, agriculture debt fell 0.5% in 2011 compared with 14.9% growth in 2007 at the height of the global cheap credit bubble. Business debt rose 1.7% last year versus 13.3% in 2007, housing debt rose 1.2% versus 12.8% growth and consumer debt fell 0.3% versus 5% growth.

Repricing of risk

Margins would be squeezed, Smith added, as the repricing of bank risk in global markets continues to rise, pushing the average cost of wholesale funding higher. "Intense competition" for deposits would continue.

"New technology and the internet has been transforming what is possible in banking and reshaping our customer habits and their expectations of us, and we have to accelerate changes to our own business models."

On top of this increasing global regulation - where Smith's ire is directed at the new Basel III capital rules that are being implemented over several years - is "permanently increasing" the cost of banking.

"And when looking at changes like Basel III, whilst these reforms were well intentioned, some of the changes are coming at the worst possible time for the world economy and I really do seriously worry about the consequences for growth and stability, especially in Europe," Smith said.

"On top of all that the world is going through a once in a century shift in the global economic and political order, obviously towards Asia. And this has to impact the strategy of every business in the western world."

Smith's comments come hot on the heels of ANZ leading an out of cycle hike in floating, or variable, mortgage rates in Australia and laying off 1,000 Australian staff. Of these moves, ANZ said they reflected a need to transform the business in "new and often painful ways." An out of cycle floating mortgage rate rise comes when the banks' lift their rates despite the Reserve Bank not increasing the Official Cash Rate.

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